What Is ESG and Why Is It Important?

What Is ESG and Why Is It Important?

Environmental, social and governance have become common reporting standards for all businesses. Alex Minett, Head of Product, CHAS explores what they are and why they’re important to your business.

ESG stands for environmental, social and governance. When used in ‌a place of work, ESG criteria means all the factors that a business should consider that impact one of these three things.

A report conducted by NAVEX® found that 49% of the respondents (in the UK and USA) said that a business’ brand reputation is impacted by performance against ESG metrics. And more than two-fifths (44%) also agreed that a publicly-traded company’s ESG ratings would influence their personal investment decision about that company’s stock.

This shows the growing need for a business to have ESG practices and ESG reporting.

What Is ESG?

For any business, ESG factors are an excellent way to build meaningful business goals and may include re-evaluating the business to manage the company’s impact on ESG factors. These factors may include the materials a company regularly uses to how they treat their employees. Still, they all fall under one of the umbrella categories of social, environmental or governance.

Environmental Criteria

This focuses on the environmental impact on the business and may primarily be concerned with environmental or other practices within the business that have the potential to contribute to climate change. These may be:

  • Environmental risks, like waste management
  • Greenhouse gas emissions from energy and fuels used
  • Carbon emissions and carbon footprint
  • Natural resources and resource scarcity, including deforestation
  • Water use.
Social Criteria

Social criteria are concerned with how a company treats its workforce and the people the business comes into contact with. This may include communities impacted by a material that a business frequently uses, like factory workers or miners. Other social criteria include:

  • Human rights within the supply chain
  • Corporate social responsibility to local communities
  • Workplace diversity and equality
  • Employee relations, including staff satisfaction levels
  • Training and education, including health and safety and accreditations.
Governance Criteria

Governance ESG initiatives are the practices, controls and procedures that are organisational. These ESG policies help to run the business ethically and ensure a business remains compliant with stakeholder needs.

  • Financial performance that includes responsible investing & tax strategy
  • Corporate governance, including board diversity
  • Executive pay and the company’s leadership
  • Bribery and Lobbying policies
  • Risk Management.
Why Is ESG Important?

While ESG performance should be a factor for all businesses, there will be different ESG risks depending on your business’s sector. Companies with supply chains will probably be more concerned with environmental factors, whilst for those in social care, both social and governance ESG criteria may be the primary focus.

Has your business taken the necessary steps to reduce the environmental impact of projects and meet environmental management standards? You can find out more about the benefits of environmental accreditation from CHAS here.

AFI members receive CHAS discounts, contact us for your code.